Ghana: An uninspiring and lazy tax?

Ghana: An uninspiring and lazy tax?

The Ghanaian Finance Ministry has released a new raft of potentially unpopular tax measures aimed at boosting government revenues and reining in an unsustainable twin current account and fiscal deficit. The IMF has backed the new measures, but opposition groups have summoned the spectre of structural adjustment to criticise the plans, writes Eric Kwame Amesimeku.

Ghana’s Minister of Finance, Seth Terkper, has put taxation at the centre of the country’s plans to dig itself out of its fiscal hole. Terkper presented the country’s budget statement for the 2015 to a degree of hostility from civil society, which feels that the government’s preference is pleasing its international creditors over delivering for its people.

The Ghanaian economy has been on a roller-coaster ride over the past 18 months as twin fiscal and current account deficits undermine confidence in the economy. Volatility in international commodity markets, in particular the country’s principle exports of gold and cocoa, have undermined Ghana’s ability to raise revenue, while a fall in the oil price to $70 per barrel, from more than $100 in June, has undermined longer-term prospects for the economy. The cedi collapsed 36% against the US dollar in the first seven months of the year, but has rebounded part way since August, when the government signalled that it was willing to discuss a programme of support with the International Monetary Fund (IMF).

Ghana’s fiscal crisis began in 2010 with huge pay rises offered to government employees, without a clear plan to increase government revenues in step. Between 2010 and 2012, the national wage bill increased 47%, eventually rising to consume more than 70% of tax revenues. Ghana has borrowed heavily from the international markets, and its external debt has risen from 26% in 2006 to more than 60% in 2014. The IMF forecasts gross domestic product growth for the year at 4.5%, well below 2013’s growth rate of 7.1%.

Windfalls from the oil industry have yet to arrive, and domestic resource mobilisation has been poor. The country’s transition in 2010 to middle-income status, after a rebasing of the economy, locked it out of concessionary loan rates and other development facilities.

Ghana raised money on the international market in July 2013, but its $750m Eurobond attracted a yield of 8% as investors punished the country for its fiscal indiscipline.

Tax on spendingIn his statement to parliament, Terkper announced measures to broaden the country’s tax base and increase government revenues. These included a special petroleum tax of 17.5%, part of a rationalisation of the value added tax (VAT) regime, and a change in the petroleum pricing structure.

Terkper also extended the National Fiscal Stabilisation Levy, a 5% tax on the accounting profits of companies and institutions. Originally put in place in July 2013, it will now run until 2017, alongside a special import levy of between 1-2% on certain goods and services. Fee-based financial services will attract VAT, and real estate transactions will now attract a 5% flat tax, rather than 17.5% VAT.

The IMF, which concluded a mission to Ghana in late November, praised the budget and the government’s attempts to rein in the fiscal deficit.

“The budget includes some important measures to increase revenues, to eliminate distortive and inefficient energy subsidies, and to contain growth in Ghana’s comparatively high public wage bill,” Joël Toujas-Bernaté, the head of mission, said in a statement.

“At the same time, the budget allows for maintaining public investment above 5% of GDP as well as increasing social protection spending targeted at the most vulnerable.”

The Ghana Real Estate Developers Association, an umbrella body of real estate developers, welcomed the reduction in property tax, but the wider tax measures touched a nerve in some civil society groups and analysts in the country.

An NGO, the Integrated Social Development Centre, accused the government of adopting a “lazy approach” to raising revenue. The centre’s campaign coordinator, Steven Manteaw, speaking to Citi FM, an Accra-based radio station after the Finance Minister’s presentation, called VAT a “regressive” tax, and “the laziest thing that you can think of”.

Dr Richard Amoako-Baah, a Political Science Professor at the Kwame Nkrumah University of Science and Technology, described the budget as “uninspiring”, and said that he was particularly worried about the government’s continuous borrowing when the country’s debt stock has already hit 60.8% of GDP.

The imposition of a special 17.5% levy on petroleum is potentially more contentious. Wholesale oil prices have reduced on the international markets, but imported inflation on top of an additional tax could drive up fuel prices considerably for Ghanaian citizens, which could prove politically unpopular.

While Ghanaians are becoming accustomed to new taxes as the economic crisis rolls on, rising fuel prices at the point of sale are likely to have knock-on effects for consumers.

Kwaku Agyemang Kwarteng, a Member of Parliament from the opposition New Patriotic Party, blamed the IMF for government’s “desperate measure”, which he contends will only compound hardships Ghanaians have been suffering.

Many Ghanaians remember the IMF’s ’structural adjustment’ programmes in the 1980s and 1990s, which demanded cuts to subsidies and public spending in exchange for financial support. The international capital markets, however, are hoping that opposition to the Fund will not prevent the government from agreeing a new programme of lending.

The Finance Minister also outlined a number of medium-term measures aimed at delivering growth and reducing the fiscal deficit. Terkper said that the government aims to bring the budget deficit down to 6.5% of GDP in 2015, and to 3.5% by 2017. He introduced investments in the energy sector and export sectors.

Energy sector boostThe completion of the Ghana Gas Project could offer some respite. The $850m project was slated to begin operations in December 2013, but stalled due to funding difficulties. The delay to the project, which brings gas for domestic supply from the offshore Jubilee oil field, further weakened Ghana’s balance of payments, as the country had to continue to spend out of its budget to import oil. The gas will be used to power turbines at the Aboadze power station, and generate 500MW of power. Power shortages have long been a drag on business growth and economic diversification.

“The full commissioning of the gas-processing facilities using the base stock gas will allow for the production and full supply of up to 150m standard cubic feet of lean gas per day to the Volta River Authority at its Aboadze thermal power energy needs,” Terkper said.

“This milestone of bringing gas on-stream will provide better power generation flexibility for our country. Indeed, the new gas infrastructure will position the nation to make significant savings over crude oil imports for power generation.”

The hydrocarbon sector also received a boost following the signature in late November of a $6bn production agreement with ENI, the Italian oil major. The deal should see production in the Offshore Cape Three Points block begin in 2017.Oil is unlikely to prove a panacea. GDP growth for 2015 is forecast at 4.7%, which will not be enough to begin to bridge the fiscal and current account deficits. The government hopes to reach GDP growth of 9.6% in 2017 in order to bring its finances back onto a more sustainable track without causing too much economic grief for its people.

It is a huge challenge. As Richard Segal, head of international credit strategy at Jefferies International, told Bloomberg: “It’s difficult to see, with the economy slowing, the problems in the energy sector and the delays in ramping up oil production, how that can be achieved,” he said. “There’s good reason to be sceptical.”

Written by Eric Kwame Amesimeku

Eric Kwame Amesimeku is a Ghanaian journalist with over nine years journalism experience. Eric was the Editor of Ghana Business and Finance magazine, as well as the Business Editor of Business World magazine.

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